The current obsession among water company bosses is not Labour’s nationalisation plans, about which they can do precisely nothing. Rather, the hissing and fussing concerns an event that falls four days after polling day: the regulator Ofwat’s unveiling of its pricing regime for the next five years.
The so-called final determination is when companies learn what they can charge customers and what they’re expected to achieve in reducing leaks, pollution and flooding. To listen to some of the grumblers, you’d think the sky is about to fall in.
Ofwat has been “politicised”, they claim, as they accuse Jonson Cox, the chairman, of being intimidated by nationalisation fever. Companies tell fearful tales of how the updated framework, which would cut household bills by an average of £50 over the next five years, will make it impossible to upgrade pipes while making a fair return on capital. A few threaten to run off to the Competition and Markets Authority for a review, as they are entitled to do, if the regulator doesn’t ease up.
That the determination will be tougher than previous settlements is almost a given. The outcome is the culmination of a three-part process and only three companies – Severn Trent, United Utilities in the north west and South West Water, which is owned by Pennon – scored good marks for their 2020-25 plans in the early stages. A showdown in some form with the laggards is the way to bet.
In the world outside boardrooms, the corporate whining will sound baffling. Of all the privatised utilities, water has had the easiest regulatory ride. Dividends have been extracted on a colossal scale, borrowings have risen and performance levels for consumers, in the round, seem to have reached a plateau. A tougher regime, however that’s defined, seems entirely in order.
Indeed, once you dig into the details of the early draft determinations, it’s outrageous that “financial game-playing”, as Ofwat has called it, has been tolerated for so long.
The regulator now wants companies to share with consumers any winnings that accrue from excessive leverage, meaning debt levels beyond an assumed par level of 60% of a capital base. The revised principle seems correct: returns for owners in a regulated monopoly should be dictated primarily by operational success or failure, not financial engineering and skill in minimising tax.
Unhappy firms have separate operation-related beef, naturally, which tends to centre on the idea that Ofwat’s latest definition of an efficient water company is too demanding. That would be the basis of any appeals to the CMA, one assumes. But it would be a risky stance for the companies to adopt: more enlightened water bosses concede the industry has been woefully slow in investing in technologies such as satellite-mapping and robots in pipes to predict faults and spillages.
Indeed, if Labour doesn’t win and if the water industry in England and Wales remains privatised, an unprecedented series of appeals to the CMA after 16 December could be something to welcome. It might suggest that, after 30 years of lax regulation, Ofwat has finally discovered a backbone.
Route to tax transparency is decidedly unclear
Statistic of the day, courtesy of the Irish Fiscal Advisory Council (IFAC): half of all of corporate taxes paid in Ireland come from just 10 global companies.
The budgetary body didn’t name the companies but it’s not hard to suggest a few likely candidates. It’ll be the likes of Apple, Facebook and Google, who are there for the enticing arrangements that are available on profits related to patents and intellectual property. The actual tax rates can be low, but the accompanying activity channelled through Ireland can be very high.
No wonder the IFAC also warned that Ireland was “vulnerable to changes to the global tax environment”, especially the attempt by the Organisation for Economic Co-operation and Development to curtail tax avoidance strategies.
No wonder, too, that Ireland was one of several EU member states that voted on Thursday against a proposal to reveal multinationals’ tax returns on a country-by-country basis. This was the legislation mentioned here recently – a three-year-old proposal that had been blocked for ages, even though it merely demanded transparency rather than a change in actual tax rates. Now it has been formally defeated.
Good luck to the OECD, which is fighting a necessary fight to bring the taxation of multinationals into the 21st century. But do not bet on rapid progress – even on seemingly easy territory such as transparency, everyone nods along until it comes to actually voting.
